China Admits It Has An Overcapacity Bubble

Earlier in the year we unveiled the most 'epic' Chinese over-capacity bubble chart. Of course, China bulls shrugged at such inconvenience as demand and supply imbalance (even as Michael Pettis destroyed many of their hopes and dreams as all that debt - to over-build and over-supply - has to be repaid). Fast forward to today, on the eve of the nation's Third Plenum, and Chinese leaders are facing the music. As AP reports, leaders have ordered local officials to stop expanding industries such as steel and cement in which supply outstrips demand. The call, via video conference, saw planning officials warn local leaders to stop ignoring orders to reduce overcapacity in industries including steel, cement, aluminum and glass, "Those who still violate discipline will be heavily punished." One chief engineer exclaimed, "the scale of overcapacity is unprecedented."

Chinese leaders have ordered local officials to stop expanding industries such as steel and cement in which supply outstrips demand, a Cabinet statement said Tuesday, in a sign previous orders to cut overcapacity were ignored.

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In a video conference on Monday, planning officials warned local leaders to stop ignoring orders to reduce overcapacity in industries including steel, cement, aluminum and glass.

"Those who still violate discipline will be heavily punished," said the deputy director of the Cabinet planning agency

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Cement manufacturers use only 71.9 percent of their capacity as of the end of 2012, according to the statement. The steel industry used 72 percent while the rate for glass manufacturers was 73.1 percent.

The scale of overcapacity is unprecedented, the China Daily said, citing Zhu Hongren, chief engineer of the Ministry of Industry and Information Technology.

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Beijing has tried to prod producers in many industries into mergers to reduce output. But lower-level officials in many areas prop up unprofitable local companies with rent-free land and other aid.

The conflict is fed by a political system in which Communist Party officials are judged on their role in economic development.

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In some places, the Cabinet statement said, local leaders go through the motions of obeying orders to tear down older steel mills, but then replace them with bigger facilities.